Subprime Market Vital to Success but Can Be Difficult on Dealers

FAYETTEVILLE, N.C. — Competition in the subprime market has never been fiercer as an increasing number of lenders are getting into this area and more franchised dealers are jumping in to improve their profit margins.

No one is feeling this competition more than buy-here, pay-here dealers who have had to buy deeper down in the spectrum, strengthen already ironclad underwriting procedures and even extend their average terms in order to remain profitable.

What is normally risky business is tougher than ever, dealers recently explained to SubPrime Auto Finance News.

"People seem to have less and less money to put down, or they've figured out they can get into vehicles with the increase in subprime financing," explained Chris Martin, the president of E-Z Auto, a BHPH store in Fayetteville, N.C.

"They can get into vehicles with less and less down, so they're demanding that," Martin added.

That demand doesn't seem to be decreasing as dealers from throughout the country reported on the deterioration of consumer credit to SubPrime Auto Finance News. Dealers said their customers appear to need more financial assistance or are asking for less money down on their purchases.

Keith Hagler, president of Taylor Auto Credit, a BHPH operation in Taylor, Texas, delved further into the extent of consumer financial woes and how it has impacted his sales.

"I think we're getting more and more customers every day that seem to fall in this market. They're credit-challenged, and that's what we're here for," Hagler said.

"I think if you don't max out your interest and you charge a fair price and you don't mark your cars up too high, you'd be surprised. You'll get some good customers. It's almost like BHPH is turning into subprime. With the cars we're buying, I keep trying to buy a better car and a better product. I think so many BHPH dealers are doing that. They're inching up, and all of a sudden we're all getting up to the subprime market," he continued.

Both Martin and Hagler described how they have tightened up the underwriting practices at their stores. The changes have affected sales totals but better-qualified customers end up making the purchase, the dealers said.

"Before we started tightening our underwriting a couple of years ago, pretty much if the customer had 20-percent down, they were breathing and had a driver's license, we could get them delivered," Martin explained.

"But now we can get them in with 10 percent or even less down. Again we're looking at the individual and making sure we're comfortable with them and that the likelihood of them paying is pretty good. We're still taking quite a bit of risk, but we're taking a hard look at it," he continued.

Suggesting that dealers to go to greater lengths to tighten underwriting was just a portion of the recommendations made by Ken Shilson during last year's National Alliance of Buy-Here, Pay-Here Dealers Collection Conference.

"When you're not doing good underwriting, you're burying the customer and burying the deal. Be an underwriter, not an undertaker. The more you learn about customers, the more you earn," said Shilson, the founder of the NABD.

Franchised Dealers Should Dedicate Staff to Subprime

Independents or BHPH dealers aren't the only stores delving into the subprime market. Many franchised dealers find themselves getting on the bandwagon as more consumers are coming into their showroom with credit issues.

For example, Marshall Hebert, president of Bob Post Auto Plaza in Shreveport, La., which covers Chrysler, Plymouth and Jeep, said he has dedicated an F&I specialist in his store whose sole job is to work with subprime transactions.

"It really takes a little bit more work than your other people who are handling your regular business," Hebert noted.

"I think making sales to subprime customers sometimes is the difference in having a profit for the month and not because we find that we both sell new and used to subprime customers. If you're doing 15 or 20 of those deals per month, you can look and see that it is the case of being profitable or not," he explained.

Another executive from a franchised dealership - James Tolkan, general manager of Bob Tolkan Buick-Pontiac-GMC in Milwaukee - also pointed out that the extra effort it takes to work with a subprime customer often is worth it to a store's bottom line.

"First you have to find the right vehicle that will work, a car that has a relatively low acquisition price against what its loan value is. Then you work with the lenders, tell the stories and get the documentation so those credit sources will buy the deals," Tolkan explained.

"The people that are affected really do need the cars so they can get to work. More and more people have found themselves in more precarious credit situations. It's just another segment of the market that we feel we should not ignore. It's the chance to maybe sell and extra 10 or 15 cars a month that we otherwise wouldn't," he added.

Future of the Market

As more and more consumers are getting in over their heads financially, dealers report that it's more important than ever to have the staff and processes in place to work with these customers or a good profit opportunity may be lost.

However, dealers stress the importance of having knowledgeable people working in this area, or more money could be ultimately lost than gained. Some of the BHPH dealers even voiced concerns over the lenders who they see as competition in the nonprime arena.

"I'm hoping this is running in a cycle and we're going to see some of these subprime finance companies that have gone gung-ho into the subprime market ease off a little bit and get a little tighter with their money," explained Martin, whose dealership is a BHPH operation that has been feeling the pinch and the pressure to reach deeper in the subprime category to make a profit.

"I think we're seeing a little bit of that. I've heard some rumblings of that when talking with other dealers. That would open the doors for us to get a little bit more of our market back," he added.

"I think it's going to be a lot more of the same this year. I think you're going to have to hunker down and find ways to cut costs and maximize every penny you can, every expense you can. I think we're just going to have to try to get through 2007 and probably a good portion of 2008, and hopefully we'll start to see things turn around again," Martin continued.

Bob Fahey, president of Fairdale Auto Sales in Cambridge, Ohio, offered up some advice for professionals associated with this difficult segment of the industry.

"Hire a knowledgeable staff that knows what they're doing. The industry is so complicated nowadays, if you don't know what you're doing, you can get buried in a hurry," Fahey highlighted.

To make sure management and staff are up-to-date on all processes and regulations, Hagler reminded dealers that several organizations offer training information.

"I think the ones that are going to make it are the ones that take care of their customers, service what they sell and sell a good product. Then everything will be fine," Hagler concluded.